According to a recent DFC Intelligence study, online gaming is set to reach $13 billion by 2010 -- from about $4.5 billion in 2007.

Numbers like these have stirred up a great deal of discussion around the different monetization models for online games, with two clear camps emerging -- subscription and free-to-play.

But each method comes with significant problems on actually collecting money online from consumers, thanks to chargebacks and other credit card problems.

Gene Hoffman, CEO of billing and fraud management company Vindicia, as used by companies such as Cryptic Studios, FireSky, Multiverse and Outspark, recently spoke to Gamasutra about MMO fraud, and he now returns to discuss the implications of different online game business models for publishers -- and the billing trade-offs that come with each.

"Taken as a given is that the gamer experience will be positive enough that people will want to play it independent of the business model chosen," Hoffman notes.

Subscriptions

A few key metrics drive the overall revenue equation from a publisher's perspective: chief among these is the "average lifetime value" per customer. It's determined, says Hoffman, by simply multiplying the monthly subscription price by the length of time, in months, that a customer is expected to play.

So while the overall game experience plays a major role in player retention, specific payment issues also come into play, says Hoffman: "Our experience has shown that focused attention on minimizing payment failures can lead to a six percentage point increase in retention."

Assuming 300,000 subscribers who each pay $15 per month for an average 16 months, simply taking additional measures to ensure customers can pay easily -- and that they do -- can drive an additional $4 million in revenue, according to Hoffman.

Another key factor in the economics of subscription models is the idea of "false positives" -- in other words, when fraud protection systems unwittingly keep out legitimate customers and their transactions. Hoffman says this can cost $240 per false positive.

"Given the high margins associated with online subscription-based games, there is a significant cost to rejecting valid transactions," he explains. "Eliminating a 1% false positive rate equates to over $700,000 in recovered revenue."

Hoffman notes that subscriptions have a downside: When it looks like there's a fixed monthly price until eternity, even a game's most dedicated fans can eventually balk. Many publishers entice retention with discounts for longer commitments, but Hoffman also suggests that creating a demand for multiple subscriptions per user can prolong the average customer's lifetime value.

Games can also offer add-ons to the base subscription -- Hoffman notes that these "allow more devoted and less price sensitive players to more routinely pay for more value and drive the ACLV higher."

Pure subscription models, by their very nature, keep out that portion of the player population who's not willing to pay that amount, however.

"So, while the modeling of the revenue equation is easier, there will always be inherent elasticity to the game," Hoffman says.

Tiered subscriptions wherein the first tier is free can also help a game reach price-sensitive players, but then it adds to the publisher's objectives the need to optimize conversion rates from free to paying -- while still maintaining the value and integrity of the free experience.

Free To Play And Virtual Goods

The major draw of a free game that monetizes on the sale of virtual items is the idea that every person who is attracted to the game can essentially select their own payment threshold, Hoffman explains -- pricing for every gamer's budget.

And although it is much more difficult to calculate the average customer's lifetime value using this model, Hoffman points out another way to measure the financial success of a free-to-play game.

"Another good approximation of the revenue success of a FTP model is charting the growth in average revenue per player, per month -– this would also account for the players who pay nothing," he says.

This number can be influenced by variables like the percentage of visitors who register, percentage who spend money -- and how many purchases per month they make, the average size of their orders and the game's drop-off rate.

"Every free to play and microtransactions publisher needs to factor into the model the cost of serving the population that pays nothing, and ensure that those paying nothing are economically subsidized by those who do pay," Hoffman advises.

Taking the 300,000-user subscriber base again, assume 20 percent pay regularly for an average of $20 per month. Says Hoffman, "In any given month, the $1.2 million in monthly revenue needs to more than cover the costs of serving the other 240,000 players who are playing for free."

"This is inherently different than a subscription model, where everyone pays -- and theoretically covers the marginal costs of serving that population."

The maxim "give away what is free to you" holds for microtransactions-driven games too, Hoffman says. "First, when aggregating microtransactions to avoid high processing costs, FTP games should not worry that some transactions are lost on the downside, as the marginal cost of delivering the virtual item is very low."

Even at a 10 percent lost transaction rate, Hoffman says, the perceived value remains the same. Second, he says that many games that offer player-to-player commerce don't make good a legit buyer who bought from a legit seller.

"When an FTP game receives a chargeback on a virtual item that has already been resold to a high value and legitimate customer, the right answer is to create a new copy of that item -- and make sure the valid buyer gets to keep the virtual item."

Conclusion

Hoffman stresses that publishers ought not to back away from their game's value. "As former intangible goods merchants who fought the original notion that music should be free, and as active gamers ourselves, we sense that a lot of folks are worried that their new game can’t compete with free," he says.

Nonetheless, he notes that it's always much easier to lower prices if sign ups and interactions are markedly slow in coming than it is to raise prices for a game that has been undervalued.

"You just might find that asking for a real price will in fact help in your quest to make the gaming experience that much better –- which starts off the virtuous feedback loop of more and better players driving more and better gameplay experience and higher and higher perceived value," Hoffman concludes.